Custodian REIT Plc (LON:CREI): How Does It Impact Your Portfolio?

Simply Wall St
May 8, 2018

For Custodian REIT Plc’s (LSE:CREI) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as CREI. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Not all stocks are expose to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

An interpretation of CREI’s beta

With a five-year beta of 0.15, Custodian REIT appears to be a less volatile company compared to the rest of the market. This means that the change in CREI’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, CREI appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market. LSE:CREI Income Statement May 7th 18

Could CREI’s size and industry cause it to be more volatile?

With a market cap of UK£454.94M, CREI falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, CREI’s industry, reits, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the reits industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both CREI’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is CREI’s cost structure indicative of a high beta?

An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine CREI’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, CREI appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of CREI indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts CREI’s current beta value which indicates a below-average volatility.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto CREI. Take into account your portfolio sensitivity to the market before you invest in the stock, as well as where we are in the current economic cycle. Depending on the composition of your portfolio, CREI may be a valuable stock to hold onto in order to cushion the impact of a downturn. In order to fully understand whether CREI is a good investment for you, we also need to consider important company-specific fundamentals such as Custodian REIT’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

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